Investors are pondering one question above all others: how many more geopolitical and economic shocks will there be?

The 21st century has certainly been volatile. After a long period of calm, there has been a seemingly endless supply of shocks. It started with terror attacks in 2001 before moving on to a financial meltdown in 2008, trade tensions in 2016, inflation in 2021, a ground war in Europe in 2022, and since October, the Israel–Gaza conflict has flared to new heights.

So, given how common these events are, why do we conceive of them as ‘shocks’?

If a model repeatedly clashes with the unexpected, the model must be wrong. And yet, we seem unable to give up on a calm baseline — a predictable Pax Americana — one punctuated by oddities, deviations and surprise.

That’s understandable. After the Cold War, politics and markets were cooperative. There was a low-volatility equilibrium. Economists called this placidity the ‘Great Moderation’. Diplomats entitled it the ‘Unipolar World’ where the US was the only superpower. Academics named it the ‘End of History’. Calm commerce was our north, our south, our east, our west. We thought it would last forever.

We were wrong. So here’s another question: why can’t we update our model? 

Model failure

Perhaps economics is to blame. This dismal science teaches that the economy tends towards equilibrium. Supply, demand, the price mechanism and so on.

But that’s hardly a reality. Instead, economists are forever explaining market disequilibria. Perhaps it is time to park the spontaneous order of Adam Smith and David Ricardo. Maybe, instead, we should remember Thomas Robert Malthus’s teachings of limited resources and Karl Marx’s warnings of crisis-prone capitalism.

Or perhaps politics is the culprit?

Whatever our immediate news cycle, our deeper sense of progress is indelible. The West has a positivity bias with democracy, science, the second world war, economics and innovation all seeming to have gone our way. Sure, we’ve had the occasional wobble. The wars in Vietnam and Afghanistan were hard fails. The global financial crisis was a self-imposed loss. But we still seem to think that history is on our side. Maybe it’s high time we checked in with Clio — the Greek muse of history. She may have different ideas.

The Three Cs

The point is, rather than shocks, we are witnessing normal, long-run events. Empires go to war. Economies and currencies collapse. Kings are assassinated. We need to forget the concept of ‘shocks’ and instead think about structures that drive the events of today. Let’s call them the ‘Three Cs’.

The first driver is conflict. The best example is China, a non-cooperative player, gaming the cooperative system of global trade. Through technology transfer, China has, by hook or by crook, made Western know-how its own. This has led to systemic rivalry and a budding trade war between the US and China.

Second is climate. The upside of modern industry and transport, namely scale and speed, has the significant downside of carbon emissions. The changes required to adapt society to climate change will bump against our core assumptions, including human rights. How many people will want Donald Trump’s border wall if millions of desperate climate refugees begin to move across the world?

Third is currency, or rather, currency debasement. Fiat currency is an experiment: government, private sector and household debt levels are extreme and the long-term effects of quantitative easing are yet to be seen. Who knows what happens at the end of a debt mega-cycle if your currency is, effectively, only backed up by a wink and a smile. Buckle up.

So, no more calm baselines. The abnormal is now normal. But at least there is some good news: if investors update their model with the three Cs, they need never be surprised — or shocked — again.

Ed Price is principal for geopolitical forecasting at advisory firm Ergo Intelligence and teaches at New York University’s Center for Global Affairs